What do we mean?

Generally, we have found an array of different meanings for two phrases that we use frequently: venture debt and project finance. In this article we explain below what we mean and how this may differ from others. We also talk through how and when this may be an appropriate product for companies.

Venture Debt

While the equity side of venture capital may get all the headlines, venture debt has an important part to play in a company’s funding strategy. As important as it is to have a healthy cash runway, founders do not want to be in a position where they have given away too much equity. Venture debt is often their solution to this issue. It is also cheaper: equivalent equity investments typically cost three and a half times more. However, it comes with risks in terms of security and ranking.

Typically venture debt is 3 year + money which has a mezzanine rate coupon but with equity warrants attached in order to reflect the intrinsically riskier nature of these early-stage investments. As a company reaches EBITDA positivity, venture debt may be an ideal solution to extend that cash runway. However, it is important to note that it still remains dilutive - and at the price of shares issued at the previous fund raise.

But what do we mean by venture debt? Well, that is something slightly different. We see it as 18 month to 3 year money, not necessarily with warrants attached (so therefore not dilutive), and payable based on pre-agreed catalysts. These catalysts are the key factor to repayment - we do not see aggressive amortisation of the loan as possible unless EBITDA is already cash positive, in which case a high street bank would provide a better option for the borrower. They range from R&D tax credits, significant invoices, grant repayments or even a combination of all of these. The key is for us to understand what the likelihood of these catalysts are, and what the continued cash burn for these early stage businesses is. We are here to help and our bespoke venture debt solutions have provided companies opportunities: to acquire and buyback shares, purchase necessary equipment, and grow revenues in anticipation of a later equity raise.

Project Finance

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When we refer to project finance, we are specifically talking about a finance solution for video games companies. We see project finance as both an alternative and an additive to publisher finance - we look at a game on a standalone basis and see if we can get to a position where we can lend the game developer money to build it. Similar to our venture debt offering, we are paid back on pre-agreed catalysts, such as the developer’s Video Games Tax Relief (VGTR), and in return for the loan we receive an interest payment and a revenue share of the game. Project Finance can mean any number of agreements depending on the industry and the type of provider but in this instance we are referring to a loan structure which is securitised.

As with our venture debt offering, this is not a solution for all games companies. If they are looking to go down the self-publishing route, they need to have a successful track record of ’doing it alone’ and they also need to have invested a sufficient amount of equity already to get to a “vertical slice” or demo of the game. We also invest alongside publishers so that we and the publisher can spread the number of investments that we make over a greater number of games, thereby increasing the chances of a “hit”.

Again, this is a niche offering - it normally has a sub-5yr payback depending on the timeframe for developing the game and is aimed at those companies who do not want to dilute their equity, don't want to give away too much to publishers but want an alternative source of capital.

Conclusion

In both the early-stage ecosystem and in the games market, there are plenty of alternative options and a range of providers. It is important for directors of the business to understand the risks involved with different types of financing. As with all debt solutions, the key is in the cash flow forecast, particularly how much comfort can we have in it? How confident are we of the company hitting its targets and what is the appropriate funding solution? Equity is not always the best solution and founders being diluted can lead to the wrong results. We offer alternative financing solutions - bespoke and niche...but practical, we hope.